Tesla Motors’ Entry To The Nasdaq 100 Could Hurt Shareholders

Tesla Motors Inc (NASDAQ:TSLA) is being added to the NASDAQ-100 (INDEXNASDAQ:NDX), the 100 largest non-financial companies on the exchange, but that may not be good news for the company’s investors, MarketWatch’s Tom Bemis reports.

Tesla Motors have overcome doubts

Since it first went public in June 2010, Tesla Motors Inc (NASDAQ:TSLA) has overcome serious doubts about its long-term viability. Paying off a $465 million Department of Energy loan that helped it boost production and posting its first profits in its short history, has made investors much more optimistic about the company’s future, sending stock prices soaring from $34 at the beginning of the year to over $120 now. There are also fewer people taking short positions on the company.

But companies that are added to the NASDAQ-100 (INDEXNASDAQ:NDX) have historically performed worse than those that are kicked off, Bemis explains. Since 1995 companies that were added to the index averaged 11.6 percent growth in the following year, while those that were kicked off averaged 22 percent in the year after they left. Bemis specifically mentions Netflix, Inc. (NASDAQ:NFLX), which has gone up 160 percent since it was kicked off the index last September, while the biggest recent gainer among companies added to the index is Electronic Arts Inc. (NASDAQ:EA), up 55 percent.

Stocks on NASDAQ 100 have higher expectations

Part of the reason for this discrepancy is that stocks on the NASDAQ 100 face greater scrutiny and higher expectations than other firms. Missteps and setbacks that could be seen as par for the course for other companies may be seen as disappointments and result in large selloffs, pushing stock prices down.

That doesn’t mean that investors should be selling Tesla Motors Inc (NASDAQ:TSLA), especially since the circumstances are different than most other companies that have joined the index. Most companies reach the NASDAQ-100 (INDEXNASDAQ:NDX) by overtaking another firm, but Tesla Motors is simply filling the slot left by Oracle, which recently left the NASDAQ to join the New York Stock Exchange. This difference may temper investors’ expectations and give Tesla more breathing room over the coming year.

Tesla Motors Inc (NASDAQ:TSLA) was founded in 2003 and begun production on its first model, the Tesla Roadster, in 2008. It aims to manufacture electric cars that can compete with gas-powered automobiles in the general market, and the company takes its name from the scientist Nikola Tesla, whose work on AC motors directly influenced the engines that they manufacture. Tesla Motors will officially join the NASDAQ-100 (INDEXNASDAQ:NDX) on July 15 before markets open.